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3 Common Types of ALIBABA Scams and How to Avoid Them

Alibaba Scams

While Alibaba has cleaned up its act in recent years, there are still plenty of stories about buyers being scammed by Alibaba suppliers. Alibaba does not turn a blind eye to these scams, but there are limitations to what they can do in order to help victims of fraud. In this article we look into 3 common types of Alibaba scams and explain how you can prevent the scammer from evading your compensation claim.

Scam #1: Payment Frauds

This type of scam has been on the rise in the last few years. The first time I came across a payment fraud was in late 2012. The principle is simple. The scammer hacks the suppliers email account and determines which orders are about to be paid. From the supplier sent email box, they download recently issued Proforma Invoices and make their own versions. It looks exactly like the “real” Proforma Invoice – the only difference being the beneficiary details.

Getting it now? The Alibaba scammer simply replaces the bank account beneficiary and the bank account number. What happens next is that the buyer makes the transaction, to a bank account not owned by the supplier. Often, this is a bank account located in a different province or in Hong Kong.

The supplier doesn’t receive a single dollar, and by the time you realize what happened – the scammer is long gone and almost impossible to track down. If this happens, you can only hope that your insurance got you covered. But that’s rarely the case.

Scam #2: Delivery of damaged or defective items

While avoiding a payment fraud is done with relative ease, preventing a supplier from sending damaged or defective items requires a more sophisticated approach. You need to implement a Quality Assurance process.

Before I get started on that, I want to explain how this really works. When a buyer is not providing the supplier with clear product specifications, it creates an excellent opportunity for the supplier to fill in the gaps. Let’s say you forgot to tell your supplier that you need your products to be compliant with the required regulation. Well, then your products will not be compliant with that regulation.

The reason is simple. Compliance costs time and money – and Chinese suppliers got razor thin profit margins. A compliant product shall not contain certain chemicals. That means the materials and components are slightly more expensive. On top of that, the supplier needs to test materials and components purchased from subcontractors. That too, costs money. If you fail to make your supplier understand that:

A. Your product must be compliant with a certain regulation;
B. You will verify that the product is in fact compliant with that regulation;
C. That the supplier got something to lose if they don’t comply with your requirements;

Scam #3: Proxy companies in Hong Kong

Many Chinese suppliers invoice customers using an offshore company in Hong Kong. This practice is very common among small manufacturers in China’s southern Guangdong province. There are a few reasons for this. Firstly, this setup makes it easier to hide taxable income from the Mainland Chinese tax authorities. Secondly, it makes it easier for the supplier to evade responsibility in case of a dispute with a foreign customer.

I know of one such cases. The customer paid a proxy company in Hong Kong, while the products were manufactured by another company in Mainland China. When the buyers discovered that the products were not what they expected, the supplier stopped taking their calls. Wouldn’t it still be possible to seize assets held by the proxy company in Hong Kong? Theoretically, yes.

But not so much in the real world. A proxy company is essentially a piece of paper, a bank account and a post box. There’s no office, no local representative and whatever money that’s still in the bank account can be transferred to another account in no time.

A proxy company is rarely owned by the actual supplier. Instead, an employee or relative of the legal representative is the only shareholder. However, I need to clarify that a proxy company doesn’t necessarily say that the supplier is a scammer. But it does increase the risk. In order to offset this risk, you need prevent the supplier from evading responsibility.

Besides, in many cases things go wrong, even if the supplier has the best intentions. In fact, the importer is to blame more often than one might think. Many importers assume that if they only tell the supplier to offer products of “the best price and the best quality”, everything will be just fine. However, there’s no universal definition of “good quality”.

If you don’t provide your Chinese supplier with clear and defined quality requirements, your product is most likely not going to be what you expect. Suppliers are not mind readers, and Alibaba.com cannot be expected to monitor every single email and Skype conversation between a buyer and seller – in order to ensure that the products are “good quality”. Whatever that means.

“What can I do if I fall for an Alibaba scam?”

That depends on the situation. To begin with, you need to show that the supplier listed on Alibaba.com is the scammer. Sounds simple? I say no. If you paid a proxy company, or a company that is completely unrelated to the supplier listed on Alibaba, you didn’t really do business with the supplier to begin with. That means they’re off the hook.

I’ve dealt with such situations several times. A few months ago, a young owner of a start-up called me. He was devastated. The mini table tennis boards he imported were barely good enough to be sold as scraps. In the beginning, it sounded like an easy task – he even had a signed and stamped Sales Agreement. I told him to send over the agreement, plus email conversations and quotation files.

It only took me a few minutes to realize that this case was a dead end. In fact, they couldn’t prove that the supplier they thought they did business with, had anything to do with the quality issues. Sounds confusing? Let me explain. The Sales Agreement was signed by another company in a different province, and the payment was wired to a company in Hong Kong! There was no way we could prove that the actual supplier had anything to do with the Alibaba scam. Their company name was not even mentioned on the shipping document.

Rule number one: make sure that you can show that the supplier listed on Alibaba.com, is the perpetrator of the scam. If not, you got nothing on them – and if you don’t, Alibaba can’t act. Assuming that you did your homework and can tie down the supplier to the fraud, then you got a case that can be reported to Alibaba.com. Before you send them anything, you should prepare yourself with the following:

Email history

Proforma Invoice

Sales Agreement (if any)

Photos and video showing the defective products

Transaction records

If you can show that the supplier deliberately cheated you, Alibaba will act. It’s in their interest to ensure that buyers are not scammed by suppliers. However, Alibaba.com is a private enterprise and not a government authority. There are limitations to what they can do. If the supplier refuses to cooperate, they may remove them for their supplier listing. That’s basically how far their power reaches.

In some cases, the threat of being kicked out of Alibaba, is enough to make a supplier compensate a customer. But not always. Suppliers that are going down the drain are much more likely to scam a customer, and these suppliers couldn’t care less about either their reputation or Alibaba listing. That being said, you might end up on the losing end, even if you manage to produce a strong case and make Alibaba take action.

Still, China is not a country without law enforcement. Contrary to common belief, China ranks quite well in this aspect. However, suing a Chinese company, in China, is time consuming and expensive. After all, lawyers (especially the good ones) don’t work for free. In the end, suing a Chinese supplier is not a realistic option for small businesses lacking both the time and money.

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Since I was a 22-year-old undergraduate in University, I've run a home-based business importing products from China and generating millions of Naira on a yearly basis. Since then, I've made China and its culture not only a key part of my business but also of my personal life.

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